Alex Wong
The Bank of Japan will meet before the Fed meeting and its decision on monetary policy could have far-reaching implications for global financial markets. The bank is considering raising interest rates for the first time in years. The BOJ interest rate decision is expected on 19th March.
The lifting of Japan's negative interest rate policy would undoubtedly mean that the Bank of Japan recognizes that the country's deflation risk has passed and inflation has returned. The most significant impact would be on global bond yields and foreign exchange markets.
The chances are better than 50/50
As of March 15, swaps have a 57% chance that the Bank of Japan will raise interest rates at next week's meeting. Although the probability was almost 80%, it is still significantly higher than at the end of February when it was only 20%.
Bloomberg
The Japanese yen has recently seen a significant rise against the US dollar as the likelihood of a rate hike in Japan has increased. As the likelihood of a rate hike increases, it is likely that the yen will continue to strengthen and a monetary policy announcement will be forthcoming.
Bloomberg
Additionally, interest rates in Japan have risen along the curve over the past three weeks, with the 10-year bond rate increasing by about five basis points and the 30-year bond rate increasing by about 13 basis points. That doesn't sound like much, but consider that as of March 15, the 10-year JGB was trading at just 77 basis points.
Bloomberg
Rising Japanese interest rates have global implications
The last time interest rates rose sharply in Japan was in the summer, when the BOJ tweaked its yield curve control and raised the cap on the 10-year Treasury yield. In fact, from July to September, as the 10-year interest rate rose in Japan, the 10-year US Treasury rate also rose, at almost the same pace, with the spread between the two bonds remaining somewhat constant.
Bloomberg
What may have played a key role in global interest rates peaking in late October and triggering this massive rally in stock markets in the US and Japan was the Bank of Japan's decision not to change its monetary policy on October 31, despite the fact that the case was some rumors of an impending policy change. This led to a peak in the 10-year JGB, which coincided with the peak in US interest rates. Of course, this also coincided with the US Treasury's quarterly refund announcement and the Fed's policy meeting in the following days.
Bloomberg
All of these forces came together at the same time, causing spreads between 10-year U.S. Treasuries and 10-year Japanese Treasuries to narrow, the dollar to weaken, and financial conditions to ease to a historic pace, helping to buoy stock markets to boost worldwide.
Bloomberg
The S&P 500 and the Nikkei 225
Looking at the stock rally, the S&P 500 and the Nikkei 225, when both converted to the Japanese yen, exhibit almost identical patterns. Both recovered significantly following the Bank of Japan's monetary policy decision at the end of October.
Bloomberg
While the odds of a possible rate hike at next week's BOJ meeting have shifted, predicting the outcome appears too difficult. It seems clear that the days of negative monetary policy in Japan could be coming to an end, if not at next week's meeting then perhaps in April, where the market estimates a 70 percent chance of a rate hike.
It is clear that if the BOJ does indeed respond and rates rise in Japan, interest rates will likely rise here in the US and likely worldwide as well, as the last central bank finally gives in to increasing inflationary pressures, which could lead to tightening global financial conditions .
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